Your estimate of the market risk premium is 10%. The risk-free rate of return is 5%, and JB Hi-Fi has a beta of 0.8. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

Question

BlackTom AI · Accepted Answer

We start by applying the CAPM formula: Expected Return = Risk-Free Rate + Beta × Market Risk Premium.

Option A: 13.0%
Using the given numbers: 5% + 0.8 × 10% = 5% + 8% = 13%. This exactly matches the CAPM calculation, so this option aligns with the model.

Option B: 12.0%
If the expected return were 12%, the implied premium would be 12% − 5% = 7%. With a beta of 0.8, the market risk premium implied would be 7% ÷ 0.8 = 8.75%, which is inconsistent with the stated market risk premium of 10%. Therefore this option does not satisfy CAPM with the given inputs.

Option C: 11.1%
Here, the implied premium is 11.1% − 5% = 6.1%. Dividing by beta 0.8 gives 6.1% ÷ 0.8 = 7.625% for the market risk premium implied, which again does not match the provided 10%. Hence this option is not consistent with the data.

Option D: 10.5%
This would require a premium of 5.5% (10.5% − 5%). Dividing by beta 0.8 yields 5.5% ÷ 0.8 = 6.875%, which is far from the stated 10% market risk premium. Thus this option fails the CAPM relationship given the inputs.

In summary, only the CAPM calculation with 5% risk-free rate, beta 0.8, and a 10% market risk premium yields 13%, making the 13.0% option the one that satisfies the model with the provided values.

4510_CORPFIN_1002UAC Online Quiz 2

Your estimate of the market risk premium is 10%. The risk-free rate of return is 5%, and JB Hi-Fi has a beta of 0.8. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

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